FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2003
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11257
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Checkpoint Systems, Inc.
- ----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 22-1895850
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Wolf Drive, P.O. Box 188, Thorofare, New Jersey 08086
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(856) 848-1800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark whether the Registrant is an accelerated filer, (as
defined in Rule 12b-2 of the Act).
Yes X No
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 21, 2003, there were 32,797,018 shares of the Common Stock
outstanding.
CHECKPOINT SYSTEMS, INC.
FORM 10-Q
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Shareholders' Equity 5
Consolidated Statements of Comprehensive
Income/(Loss) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-26
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 26
Item 4. Controls and Procedures 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 27-29
Item 4. Submission of Matters to a Vote of Security
Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
INDEX TO EXHIBITS 33
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 29, Dec. 29,
2003 2002
-------- --------
(Unaudited)
ASSETS (Thousands)
CURRENT ASSETS
Cash and cash equivalents $ 48,179 $ 54,670
Accounts receivable, net of allowances
of $13,398 and $14,420 134,076 130,667
Inventories 87,817 80,152
Other current assets 25,180 22,051
Deferred income taxes 10,383 10,326
-------- --------
Total current assets 305,635 297,866
REVENUE EQUIPMENT ON OPERATING LEASE, net 4,120 4,895
PROPERTY, PLANT, AND EQUIPMENT, net 102,688 100,173
GOODWILL 198,633 185,758
OTHER INTANGIBLES, net 53,357 51,611
OTHER ASSETS 35,943 38,079
-------- --------
TOTAL ASSETS $700,376 $678,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings and current
portion of long-term debt $ 18,528 $ 20,512
Accounts payable 45,236 47,418
Accrued compensation and related taxes 25,938 25,701
Other accrued expenses 28,610 27,969
Income taxes 20,885 17,860
Unearned revenues 29,825 28,493
Restructuring reserve 4,516 5,600
Other current liabilities 13,062 13,126
-------- --------
Total current liabilities 186,600 186,679
LONG-TERM DEBT, LESS CURRENT MATURITIES 50,650 68,813
CONVERTIBLE SUBORDINATED DEBENTURES 120,000 120,000
ACCRUED PENSIONS 59,929 54,006
OTHER LONG-TERM LIABILITIES 10,797 10,608
DEFERRED INCOME TAXES 14,039 12,189
MINORITY INTEREST 875 841
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized
500,000 shares, none issued
Common Stock, par value $.10 per share, 3,914 3,904
authorized 100,000,000 shares, issued
39,140,623 and 39,039,506
Additional capital 264,349 263,386
Retained earnings 82,874 67,811
Common stock in treasury, at cost,
6,356,190 shares (64,379) (64,379)
Accumulated other comprehensive loss (29,272) (45,476)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 257,486 225,246
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $700,376 $678,382
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
--------------------- --------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands, except per share data)
Net revenues $175,720 $160,924 $332,137 $304,378
Cost of revenues 100,109 94,842 193,377 178,864
-------- -------- -------- --------
Gross profit 75,611 66,082 138,760 125,514
Selling, general, and
administrative expenses 56,623 53,967 111,520 103,799
-------- -------- -------- --------
Operating income 18,988 12,115 27,240 21,715
Interest income 385 454 724 869
Interest expense 2,928 3,902 5,971 7,627
Other gain/(loss), net (209) 131 539 (100)
-------- -------- -------- --------
Earnings before income taxes 16,236 8,798 22,532 14,857
Income taxes 5,357 2,815 7,435 4,754
Minority interest 17 16 34 22
-------- -------- -------- --------
Earnings before cumulative
effect of change in
accounting principle 10,862 5,967 15,063 10,081
Cumulative effect of change
in accounting principle - - - (72,861)
-------- -------- -------- --------
Net earnings/(loss) $ 10,862 $ 5,967 $ 15,063 $(62,780)
======== ======== ======== ========
Earnings per share before
cumulative effect of change
in accounting principle:
Basic $ .33 $ .19 $ .46 $ .31
======== ======== ======== ========
Diluted $ .30 $ .18 $ .43 $ .31
======== ======== ======== ========
Net earnings /(loss)
per share:
Basic $ .33 $ .19 $ .46 $ (1.96)
======== ======== ======== ========
Diluted $ .30 $ .18 $ .43 $ (1.55)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Six Months (26 weeks) Ended June 29, 2003
------------------------------------------------------
Accumu-
lated
Other
Addit- Compre-
Common ional Retained hensive Treasury
Stock Capital Earnings Loss Stock Total
------ ------- -------- ------- -------- -----
(Thousands)
Balance,
December 29, 2002 $3,904 $263,386 $67,811 $(45,476) $(64,379) $225,246
(Common shares:
issued 39,039,506
reacquired 6,356,190)
Net earnings 15,063 15,063
Exercise of stock
options 10 963 973
(101,117 shares)
Net loss on interest
rate swap (64) (64)
Foreign currency
translation adjustment 16,268 16,268
------ -------- ------- -------- -------- --------
Balance,
June 29, 2003 $3,914 $264,349 $82,874 $(29,272) $(64,379) $257,486
====== ======== ======= ======== ======== ========
(Common shares:
issued 39,140,623
reacquired 6,356,190)
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
--------------------- --------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands)
Net earnings/(loss) $ 10,862 $ 5,967 $ 15,063 $(62,780)
Net loss on interest
rate swap, net of tax (19) (211) (64) (211)
Foreign currency
translation adjustment 11,479 25,975 16,268 20,494
-------- -------- -------- --------
Comprehensive income/(loss) $ 22,322 $ 31,731 $ 31,267 $(42,497)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months (26 weeks) Ended
---------------------------
June 29, June 30,
2003 2002
-------- --------
(Thousands)
Cash flows from operating activities:
Net earnings/(loss) $ 15,063 $(62,780)
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Cumulative effect of change in accounting
principle, net of tax - 72,861
Revenue equipment under operating lease (613) (362)
Long-term customer contracts 1,073 2,459
Depreciation and amortization 14,630 15,543
(Gain)/loss on disposal of fixed assets (287) 199
(Increase)/decrease in current assets, net of
the effects of acquired companies:
Accounts receivable 4,649 15,737
Inventories (2,937) 4,487
Other current assets (439) (194)
Increase/(decrease) in current liabilities,
net of the effects of acquired companies:
Accounts payable (4,193) (6,483)
Income taxes 1,159 (2,904)
Unearned revenues (80) 5,413
Restructuring reserve (1,319) (7,177)
Other current and accrued liabilities (3,077) 4,454
-------- --------
Net cash provided by operating activities $ 23,629 $ 41,253
-------- --------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (7,801) (3,032)
Acquisitions, net of cash acquired - (681)
Other investing activities 439 1,524
-------- --------
Net cash used in investing activities $ (7,362) $ (2,189)
-------- --------
Cash flows from financing activities:
Proceeds from stock issuances 914 4,403
Net change in short-term debt 998 587
Payment of long-term debt (27,154) (38,299)
-------- --------
Net cash used in financing activities $(25,242) $(33,309)
-------- --------
Effect of foreign currency rate fluctuations
on cash and cash equivalents 2,484 2,330
-------- --------
Net (decrease)/increase in cash and cash
equivalents $ (6,491) $ 8,085
Cash and cash equivalents:
Beginning of period 54,670 43,698
-------- --------
End of period $ 48,179 $ 51,783
======== ========
See accompanying notes to consolidated financial statements.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Checkpoint
Systems, Inc. and its majority-owned subsidiaries ("Company"). All
inter-company transactions are eliminated in consolidation. The consolidated
financial statements and related notes are unaudited and do not contain all
disclosures required by generally accepted accounting principles in annual
financial statements. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2002 for the most recent disclosure of the
Company's accounting policies.
The consolidated financial statements include all adjustments, consisting only
of normal recurring accruals, necessary to present fairly the Company's
financial position at June 29, 2003 and December 29, 2002 and its results of
operations and changes in cash flows for the thirteen and twenty-six week
periods ended June 29, 2003 and June 30, 2002.
Certain reclassifications have been made to the 2002 financial statements and
related footnotes to conform to the 2003 presentation.
2. INVENTORIES
June 29, December 29,
2003 2002
-------- -----------
(Thousands)
Raw materials $ 9,764 $ 8,184
Work in process 4,190 3,387
Finished goods 73,863 68,581
-------- --------
$ 87,817 $ 80,152
======== ========
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company had intangible assets with a net book value of $53.4 million and
$51.6 million as of June 29, 2003 and December 29, 2002, respectively.
The following table reflects the components of intangible assets as of June 29,
2003 and December 29, 2002:
June 29, 2003 December 29, 2002
---------------------- ----------------------
Amortizable Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
----------- -------- ------------ -------- ------------
(Thousands)
Customer lists 20 $28,694 $12,937 $26,363 $10,544
Trade name 30 26,321 3,071 24,405 2,440
Patents, license
agreements 5 to 14 34,847 21,028 32,364 19,095
Other 3 to 6 804 273 778 220
------- ------- ------- -------
$90,666 $37,309 $83,910 $32,299
======= ======= ======= =======
The Company has determined that the life previously assigned to these
finite-lived assets is still appropriate, and has recorded $2.4 million and $2.6
million of amortization expense in the first half of fiscal 2003 and 2002,
respectively.
Estimated amortization expense for 2003 and each of the five succeeding years
is:
(Thousands)
2003 $4,755
2004 $4,498
2005 $3,956
2006 $3,293
2007 $3,276
2008 $3,262
The changes in the carrying amount of goodwill for the six months ended June 29,
2003, are as follows:
Labeling Retail
Security Services Merchandising Total
-------- -------- ------------- -------
(Thousands)
Balance as of
beginning of
fiscal year 2003
(December 30, 2002) $91,072 $36,895 $57,791 $185,758
Foreign currency
translation adjustment 7,058 766 5,051 12,875
------- ------- ------- --------
Balance as of
June 29, 2003 $98,130 $37,661 $62,842 $198,633
======= ======= ======= ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Pursuant to SFAS 142, the Company will perform its annual assessment of goodwill
by comparing each individual reporting unit's carrying amount of net assets,
including goodwill, to their fair value during the fourth quarter of each fiscal
year. Future annual assessments could result in impairment charges, which would
be accounted for as an operating expense.
4. LONG-TERM DEBT
Long-term debt at June 29, 2003 and December 29, 2002 consisted of the
following:
June 29, December 29,
2003 2002
-------- -----------
(Thousands)
Six and one-half year EUR 244 million
variable interest rate collateralized
term loan maturing in 2006 $ 49,828 $ 64,447
Six and one-half year $25 million
variable interest rate
collateralized term loan maturing in
2006 1,952 7,882
Six and one-half year $100 million
multi-currency variable interest
rate collateralized revolving
credit facility maturing in 2006 2,508 2,502
Twenty-two and one-half year
EUR 9.5 million capital lease
maturing in 2021 10,004 9,267
Eight and one-half year
EUR 2.7 million capital lease
maturing in 2007 1,742 1,757
Other capital leases with maturities
through 2004 51 1,385
-------- --------
Total 66,085 87,240
Less current portion (15,435) (18,427)
-------- --------
Total long-term portion (excluding
convertible subordinated debentures) 50,650 68,813
Convertible subordinated debentures 120,000 120,000
-------- --------
Total long-term portion $170,650 $188,813
======== ========
During the second quarter 2003, $3.0 million of unscheduled repayments were made
on the $25 million collateralized term loan. At June 29, 2003, EUR 43.6 million
(approximately $49.8 million) and $2.0 million were outstanding under the
multi-currency term loan. The outstanding borrowings under the revolving credit
facility were JPY 300 million (approximately $2.5 million). The availability
under the $100 million multi-currency revolving credit facility has been reduced
by letters of credit totaling $11.9 million, primarily related to the surety
bond posted in connection with ID Security Systems Canada Inc. litigation.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. INCOME TAXES
Income taxes are provided for on an interim basis at an estimated effective
annual tax rate. The Company's net earnings generated by the operations of its
Puerto Rico subsidiary are exempt from Federal income taxes under Section 936 of
the Internal Revenue Code (as amended under the Small Business Job Protection
Act of 1996) and substantially exempt from Puerto Rico income taxes. Under
current law, this exemption from Federal income tax is subject to certain limits
during the years 2002 through 2005 and will be eliminated thereafter. The
Company's exemption was not negatively impacted in 2002. The Company does not
expect its exemption to be negatively impacted in the years 2003 through 2005.
Under Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes", deferred tax liabilities and assets are
determined based on the difference between financial statement and tax basis of
assets and liabilities using enacted statutory tax rates in effect at the
balance sheet date.
6. PER SHARE DATA
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands, except per share amounts)
Basic earnings/(loss)
per share:
Earnings before cumulative
effect of change in
accounting principle $ 10,862 $ 5,967 $ 15,063 $ 10,081
Cumulative effect of change
in accounting principle - - - (72,861)(1)
-------- -------- -------- --------
Net earnings/(loss) $ 10,862 $ 5,967 $ 15,063 $(62,780)
======== ======== ======== ========
Weighted average common
stock outstanding 32,762 32,232 32,743 32,088
======== ======== ======== ========
Basic earnings per share
before cumulative effect
of change in accounting
principle $ .33 $ .19 $ .46 $ .31
Cumulative effect of
change in accounting
principle - - - (2.27)
-------- -------- -------- --------
Basic earnings/(loss)
per share $ .33 $ .19 $ .46 $ (1.96)
======== ======== ======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Diluted earnings/(loss) per share:
Earnings before cumulative
effect of change in
accounting principle $ 10,862 $ 5,967 $ 15,063 $ 10,081
Interest on subordinated
debentures, net of tax 961 961 1,922 1,922
-------- -------- -------- --------
Net earnings before
cumulative effect of change
in accounting principle
available for dilutive
securities 11,823 6,928 16,985 12,003
Cumulative effect of change
in accounting principle - - - (72,861)(2)
-------- -------- -------- --------
Net earnings/(loss) after
cumulative effect of change
in accounting principle
available for dilutive
securities $ 11,823 $ 6,928 $ 16,985 $(60,858)
======== ======== ======== ========
Weighted average common
stock outstanding 32,762 32,232 32,743 32,088
Additional common shares
resulting from stock
options (1) 501 718 296 726
Additional common shares
resulting from subordinated
debentures 6,528 6,528 6,528 6,528
-------- -------- -------- --------
Weighted average common
stock and dilutive stock
outstanding 39,791 39,478 39,567 39,342
======== ======== ======== ========
Diluted earnings per share
before cumulative effect
of change in accounting
principle $ .30 $ .18 $ .43 $ .31
Cumulative effect of change
in accounting principle - - - (1.86)
-------- -------- -------- --------
Diluted earnings/(loss)
per share $ .30 $ .18 $ .43 $ (1.55)
======== ======== ======== ========
(1) Excludes approximately 1,179, 1,210, 1,816, and 1,284 anti-dilutive
outstanding stock options for the second quarters of 2003 and 2002, and the
first six months of 2003 and 2002, respectively.
(2) No tax effect as goodwill amortization is non-deductible for tax.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes for the thirteen and twenty-six week
periods ended June 29, 2003 and June 30, 2002 were as follows:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands)
Interest $ 4,514 $ 5,394 $ 5,988 $ 7,494
Income tax payments, net $ 4,153 $ 2,391 $ 3,107 $ 3,259
8. PROVISION FOR RESTRUCTURING
Accrual Cash Accrual
at Decrease Payments at
Beginning in (and Exchange March 30,
of 2003 Goodwill Rate Changes) 2003
--------- -------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 3,788 $ - $ (639) $ 3,149
Lease termination
costs 1,812 - (128) 1,684
------- ------- ------- -------
$ 5,600 $ - $ (767) $ 4,833
======= ======= ======= =======
Accrual Cash Accrual
at Decrease Payments at
March 30, in (and Exchange June 29,
2003 Goodwill Rate Changes) 2003
--------- -------- ------------ --------
(Thousands)
Severance and
other employee
related charges $ 3,149 $ - $ (263) $ 2,886
Lease termination
costs 1,684 - (54) 1,630
------- ------- ------- -------
$ 4,833 $ - $ (317) $ 4,516
======= ======= ======= =======
At the end of the second quarter 2003, 46 of the 61 planned employee
terminations, related to the 2002 restructuring, and 293 of the 322 planned
employee terminations, related to the 2001 restructuring, had occurred. The
Company expects the terminations and restructuring actions to be completed by
the end of 2003. Termination benefits are being paid out over a period of 1 to
24 months after termination.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
9. CONTINGENT LIABILITIES
The Company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of business, except for the matters described
in the following paragraphs. Management believes it is remotely possible that
the ultimate resolution of such matters will have a material adverse effect on
the Company's consolidated results of operations and/or financial condition,
except as described below.
On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States
District Court for the Eastern District of Pennsylvania, filed by plaintiff ID
Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of
the Company on the plaintiff's claim for Monopolization of Commerce, but against
the Company on claims of Attempted Monopolization and Conspiracy to Monopolize.
In addition, the jury held against the Company on two tort claims related to
tortious interference and unfair competition. Judgment was entered on the
verdict in favor of the plaintiff, after trebling, in the amount of $79.2
million plus attorneys' fees and costs to be determined by the Court.
On June 14, 2002, in response to Motions filed by the Company, the Court stayed
the execution of the judgments pending disposition of the Company's Motion for
Post-Trial Relief and ordered the Company to post a bond in the amount of $26.4
million and to place into escrow 3,179,600 shares of the Company's treasury
stock. The Company complied with the Court's order.
On March 28, 2003, in response to the Company's Motion for Post-Trial Relief,
the Court issued an order which vacated the jury verdict on the antitrust claims
and reduced the damages award related to tortious interference and unfair
competition from $19 million to $13 million. The Company subsequently filed an
additional motion to further reduce the $13 million by $2.1 million based on a
prior agreement between the parties and a previous Order by the Court. The Court
granted the Company's motion, and on May 20, 2003 further reduced the judgment
from $13 million to $10.9 million. On the same date, the Court (1) authorized
the release to the Company of the $26.4 million bond and escrowed treasury
shares previously posted as security by the Company, (2) directed the Company to
post a replacement bond in the reduced amount of $11.3 million, which amount was
subsequently amended to $11.4 million, and (3) stayed execution of the judgment
upon the posting of said bond by the Company. The Company promptly posted the
requisite bond and execution on the judgment in the amount of $10.9 million is
now stayed.
Both ID Security Systems Canada Inc. and the Company have filed appeals to the
Third Circuit Court of Appeals related to the various decisions of the Court.
Based on input from outside legal counsel, management is of the opinion that the
Judge's Order is consistent with the law as it relates to the antitrust issues,
and is not consistent with the law as it relates to the tortious interference
and unfair competition aspects of the case. Accordingly, no liability has been
recorded for this litigation, as management believes that, at this time, it is
not probable the remaining judgment will be upheld and that the reasonably
possible range of the contingent liability is between zero and $11 million.
Management believes it is remotely possible that the Court of Appeals could
reverse the decision of the lower Court as it relates to the antitrust claims
and reinstate the original judgment of $79.2 million plus attorneys' fees
and costs.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
If the final outcome of this litigation, after all appeals have been exhausted,
results in certain of the plaintiff's claims being upheld, the potential damages
could be material to the Company's consolidated results of operations and/or
financial condition and could cause the Company to be in default of certain bank
covenants. Although management expects to prevail in the appeal process, should
the appeal be unsuccessful, management anticipates that any final judgment would
not be paid prior to the end of 2004 and is of the opinion that the Company will
have sufficient financial resources in the form of cash and borrowing capacity,
due to the cash flow generated during the intervening period, to satisfy any
judgment.
A certain number of follow-on purported class action suits have arisen in
connection with the jury decision in the ID Security Systems Canada Inc.
litigation. The purported class action complaints generally allege a claim of
monopolization and are substantially based upon the same allegations as
contained in the ID Security Systems Canada Inc. case (Civil Action No.
99-CV-577) as follows:
On August 1, 2002, a civil action was filed in United States District Court for
the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER)
by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc.
and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of
Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the
named plaintiff was changed to Medi-Care Pharmacy, Inc.
On August 2, 2002, a civil action was filed in the United States District Court,
District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by
plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint
Systems, Inc. and served on August 26, 2002.
On October 2, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777 (JBS)
by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on
October 7, 2002.
On October 23, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001 (JEI)
by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc.
and served on November 1, 2002.
On October 18, 2002, The United States District, District of New Jersey (Camden)
entered an Order staying the proceedings in the Club Sports International, Inc.
and Baby Mika, Inc. cases referred to above. In accordance with the Order, the
Stay will also apply to the Washington Square Pharmacy, Inc. case referred to
above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will
be voluntarily dismissed, and has been re-filed in New Jersey and is included in
the Stay Order. The Stay is expected to remain in place until such time as the
ID Security Systems case, referred to above, is either terminated or any appeals
have been exhausted in the Third Circuit Court of Appeals.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On November 13, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319
(JEI) by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and
served on November 15, 2002.
On December 30, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131
(JEI) by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc.
and served on January 3, 2003.
Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were
consolidated with the previously mentioned cases and are included in the Stay
Order referred to above. No liability has been recorded for any of the purported
class action suits as management believes that, based on input from outside
legal counsel, it is not probable the judgment will be upheld and that the lower
end of the reasonably possible range of the contingent liability is zero at this
time. The high end of the range cannot be estimated at this time.
On February 28, 2003 a civil action was filed in the Superior Court of New
Jersey, Bergen County, by Franklin Graphics, Inc. against Checkpoint Systems,
Inc. and Christopher Clarke, (Docket No. BER-L-1575-03) seeking compensatory
damages in excess of $1 million, treble damages, punitive damages, and
attorneys' fees. The plaintiff alleges tortious interference with a contractual
relationship and prospective economic relations, unfair competition, violation
of duty loyalty, breach of contract and consumer fraud.
The factual basis for the suit may be summarized as follows. The Company
performed clothing label tag printing services as a subcontractor to the
plaintiff for a number of apparel manufacturers who were customers of the
plaintiff. Co-defendant Clarke was an employee of plaintiff who had
responsibility for interfacing with apparel manufacturers and the Company
Defendant Clarke left the employ of plaintiff early in 2002, establishing his
own business. Subsequently, defendant Clarke joined the Company as an employee.
Certain of the customers of the plaintiff ceased doing business with plaintiff
and engaged Checkpoint directly to perform the clothing label tag printing
services.
The Company disputes any liability to plaintiff and intends to defend this
matter vigorously. The Company has filed a motion to dismiss the consumer
fraud/treble damage claim and intends to counterclaim for approximately $0.1
million for goods and services provided. The potential likelihood of collection
on the counterclaim or liability on the plaintiff's claims cannot be estimated
at this time, therefore no liability has been recorded for this suit. Management
is unable to predict the outcome of this proceeding, but does not believe that
the ultimate resolution will have a material adverse affect on the consolidated
financial position or results of operation of the registrant, however, if such
matter were determined adversely to the registrant, the ultimate liability
arising therefrom should not be material to the financial position of the
Company, but could be material to its results of operation in any quarter or
annual period.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table sets forth the movements in the warranty reserve:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands)
Balance at the beginning
of the period $ 4,111 $ 3,213 $ 4,002 $ 3,303
Accruals for warranties
issued $ 280 $ 135 $ 496 $ 392
Accruals related to
pre-existing warranties,
including changes in
estimates - 28 - (86)
-------- -------- -------- --------
Total accruals $ 280 $ 163 $ 496 $ 306
Settlements made (204) (68) (385) (263)
Foreign currency
translation adjustment 186 305 260 267
-------- -------- -------- --------
Balance at the end of the
period $ 4,373 $ 3,613 $ 4,373 $ 3,613
======== ======== ======== ========
10. BUSINESS SEGMENTS
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands)
Business segment net revenues:
Security $111,962 $ 99,187 $204,726 $178,284
Labeling Services 39,392 37,851 78,015 73,698
Retail Merchandising 24,366 23,886 49,396 52,396
-------- -------- -------- --------
Total $175,720 $160,924 $332,137 $304,378
======== ======== ======== ========
Business segment gross profit:
Security $ 51,921 $ 43,960 $ 91,563 $ 77,820
Labeling Services 11,724 11,291 23,047 22,539
Retail Merchandising 11,966 10,831 24,150 25,155
-------- -------- -------- --------
Total gross profit $ 75,611 $ 66,082 $138,760 $125,514
Operating expenses 56,623 53,967 111,520 103,799
Interest expense, net 2,543 3,448 5,247 6,758
Other gain/(loss) (209) 131 539 (100)
-------- -------- -------- --------
Earnings before income taxes $ 16,236 $ 8,798 $ 22,532 $ 14,857
======== ======== ======== ========
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
11. STOCK OPTIONS
At June 29, 2003, the Company has one stock-based employee compensation plan.
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company continues to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees". Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of grant over the amount an employee must
pay to acquire the stock. Since all options were granted at market value, there
is no compensation cost to be recognized. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date using the Black Scholes option pricing model prescribed under
SFAS 123, the Company's net earnings/(loss) and net earnings/(loss) per share
would approximate the pro-forma amounts as follows:
Quarter Six Months
(13 weeks) Ended (26 weeks) Ended
-------------------- --------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Thousands)
Net earnings/(loss),
as reported $ 10,862 $ 5,967 $ 15,063 $(62,780)
Total stock-based
employee compensation
expense determined
under fair value
based method,
net of tax (806) (273) (1,672) (1,599)
-------- -------- -------- --------
Pro-forma net
earnings/(loss) $ 10,056 $ 5,694 $ 13,391 $(64,379)
======== ======== ======== ========
Net earnings/(loss)
per share:
Basic, as reported $ .33 $ .19 $ .46 $ (1.96)
======== ======== ======== ========
Basic, pro-forma $ .31 $ .18 $ .41 $ (2.01)
======== ======== ======== ========
Diluted, as reported $ .30 $ .18 $ .43 $ (1.55)
======== ======== ======== ========
Diluted, pro-forma $ .28 $ .17 $ .39 $ (1.96)(1)
======== ======== ======== ========
(1) The conversion of 6,528 common shares from the subordinated debentures is
not included as it is anti-dilutive.
CHECKPOINT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. NEW ACCOUNTING PRONOUNCEMENTS AND OTHER STANDARDS
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables".
The standard provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into by the Company after June 29, 2003. The Company does
not expect the adoption of EITF Issue No. 00-21 to have a significant impact on
its consolidated financial statements.
In January 2003, the FASB issued interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied to the Company's consolidated financial
statements for the period ending September 28, 2003. The Company does not expect
the adoption of FIN 46 to have a significant impact on its consolidated
financial statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information relating to Forward-Looking Statements
This report includes forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Except for
historical matters, the matters discussed are forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following risk factors, among other possible factors,
could cause actual results to differ materially from historical or anticipated
results: (1) changes in international business conditions; (2) foreign currency
exchange rate and interest rate fluctuations; (3) lower than anticipated demand
by retailers and other customers for the Company's products, particularly in the
current economic environment; (4) slower commitments of retail customers to
chain-wide installations and/or source tagging adoption or expansion; (5)
possible increases in per unit product manufacturing costs due to less than full
utilization of manufacturing capacity as a result of slowing economic conditions
or other factors; (6) the Company's ability to provide and market innovative and
cost-effective products; (7) the development of new competitive technologies;
(8) the Company's ability to maintain its intellectual property; (9) competitive
pricing pressures causing profit erosion; (10) the availability and pricing of
component parts and raw materials; (11) possible increases in the payment time
for receivables, as a result of economic conditions or other market factors;
(12) changes in regulations or standards applicable to the Company's products;
(13) unanticipated liabilities or expenses; (14) adverse determinations in the
ID Security Systems Canada Inc. litigation and any other pending litigation
affecting the Company; and (15) the impact of adverse determinations in the ID
Security Systems Canada Inc. litigation on liquidity and debt covenant
compliance. More information about potential factors that could affect the
Company's business and financial results is included in the Company's Annual
Report on Form 10-K for the year ended December 29, 2002, and the Company's
other Securities and Exchange Commission filings.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Second Quarter 2003 Compared to Second Quarter 2002
- ---------------------------------------------------
Net Revenues
Revenues for the second quarter 2003 increased by $14.8 million or 9.2% from
$160.9 million to $175.7 million. Foreign currency translation had a positive
impact on revenues of approximately $18.3 million or 11.4% in the second quarter
of 2003 as compared to the second quarter of 2002.
Security revenues increased by $12.8 million or 12.9% in the second quarter of
2003 as compared to the second quarter of 2002. Foreign currency translation had
a positive impact of approximately $10.6 million. The remaining increase was
primarily due to better penetration in the electronic article surveillance (EAS)
markets in Europe and Asia Pacific and in the closed-circuit television (CCTV)
market in the USA, partially offset by a decline in US EAS sales. Labeling
services revenues increased by $1.5 million. The increase was due to the
positive impact of foreign currency translation of approximately $3.9 million,
which was partially offset by lower barcode printer and label revenues in the
USA and Europe. Retail merchandising revenues increased by $0.5 million or 2.0%.
The positive impact of foreign currency translation of approximately $3.8
million, or 15.9%, was largely offset by decreases in hand-held labeling systems
(HLS) and retail display systems (RDS) in Europe. Continuing penetration of
retail scanning caused the decline in HLS. The RDS decrease was primarily due to
weaker economic conditions in Central Europe resulting in fewer new store
openings.
Gross Profit
Gross profit for the second quarter 2003 was $75.6 million, or 43.0% of
revenues, compared to $66.1 million, or 41.1% of revenues, for the second
quarter 2002. The benefit of foreign currency translation on gross profit was
approximately $7.7 million or 11.7% in the second quarter of 2003 as compared to
the second quarter of 2002.
Security gross profit, as a percentage of sales, increased from 44.3% in the
second quarter of 2002 to 46.4% in the second quarter of 2003, primarily as a
result of improvements in manufacturing efficiencies and the benefits of the
weakening US dollar on products sourced in US dollars but sold in a different
currency. Gross profit, as a percentage of net revenues, for labeling services
remained constant at 29.8%. The retail merchandising gross profit percentage
increased 3.8% (from 45.3% to 49.1%) in the second quarter of 2003 compared to
the second quarter of 2002. The increase was principally due to an improvement
in RDS gross profit in Europe and an increase in HLS sales to smaller accounts,
which generate lower revenues at a higher gross profit percentage.
For the second quarter of 2003 and 2002, field service and installation costs
were 8.7% and 8.0% of net revenues, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General, and Administrative Expenses
SG&A expenses increased $2.7 million (or 4.9%) over the second quarter of
2002. Foreign currency translation increased SG&A expenses in the second quarter
of 2003 by approximately $5.7 million over the comparable quarter in 2002. The
second quarter of 2002 included $2.8 million of compensation costs associated
with executive management changes and legal fees for the ID Security Systems
Canada Inc. litigation. As a percentage of net revenues, SG&A expenses decreased
to 32.2% from 33.5%.
Interest Expense and Interest Income
Interest expense for the second quarter of 2003 decreased $1.0 million from the
comparable quarter in 2002 (from $3.9 million to $2.9 million) due to debt
repayment over the last twelve months. Interest income for the second quarter of
2003 decreased by $0.1 million from the comparable quarter in 2002 (from $0.5
million to $0.4 million) as a result of lower interest rates on cash
investments.
Other (Loss)/Gain, net
Other (loss)/gain, net represented a net foreign exchange loss of $0.2 million
and a net foreign exchange gain of $0.1 million for the second quarter of 2003
and 2002, respectively.
Income Taxes
The effective tax rate for the second quarter of 2003 was 33.0%. The effective
tax rate for the second quarter of 2002 was 32.0%. The higher tax rate results
primarily from foreign income tax rate differentials.
Net Earnings/(Loss)
The Company's second quarter 2003 net earnings were $10.9 million, or $0.30 per
diluted share, compared $6.0 million, or $0.18 per diluted share, in the second
quarter 2002.
Exposure to International Operations
Approximately 67% of the Company's sales are made in currencies other than U.S.
dollars. Sales denominated in currencies other than U.S. dollars increase the
Company's potential exposure to currency fluctuations which can affect results.
Management cannot predict, with any degree of certainty, changes in currency
exchange rates and, therefore, the future impact that such changes may have on
its operations.
Restructuring
The changes in the provision for restructuring are covered in Note 8 of the
Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
First Half 2003 Compared to First Half 2002
- -------------------------------------------
Net Revenues
Revenues for the first half of 2003 increased by $27.7
million or 9.1% from
$304.4 million to $332.1 million. Foreign currency translation had a positive
impact on revenues of approximately $33.5 million or 11.0% in the first six
months of 2003 over the comparable period for 2002.
Security revenues increased by $26.4 million or 14.8% in the first half of 2003
as compared to the first half of 2002. Foreign currency translation had a
positive impact of approximately $18.3 million. The remaining increase was
primarily due to better penetration in the EAS markets in Europe and Asia
Pacific and in the CCTV market in the USA, partially offset by a decline in US
EAS sales. Labeling services revenues increased by $4.3 million, from $73.7
million to 78.0 million. The increase was due to the positive impact of foreign
currency translation of approximately $7.5 million, which was partially offset
by lower barcode systems revenues in the USA, Europe, and Asia Pacific. Retail
merchandising revenues decreased by $3.0 million or 5.7%, despite the positive
impact of foreign currency translation of $7.7 million or 14.7%. The lower
revenues primarily resulted from the decline of HLS in Europe, due to an unusual
increase in the first quarter of 2002 caused by the conversion to the Euro
currency and the continuing penetration of retail scanning, combined with a
decrease in RDS revenues caused by weaker economic conditions in Central Europe.
Gross Profit
Gross profit for the first six months of 2003 was $138.8 million, or 41.8% of
revenues, compared to $125.5 million, or 41.2% of revenues, for the first six
months of 2002. The benefit of foreign currency translation on gross profit was
approximately $14.2 million or 11.4% in the first half of 2003 as compared to
the first half of 2002.
Security gross profit, as a percentage of sales, increased from 43.6% in the
first half of 2002 to 44.7% in the comparable period of 2003, primarily as a
result of improvements in manufacturing efficiencies and the benefits of the
weakening US dollar on products sourced in US dollars but sold in a different
currency. Gross profit, as a percentage of net revenues, for labeling services
decreased from 30.6% for the first half of 2002 to 29.5% for the first half of
2003. The decrease in gross profit percentage was principally due to competitive
pricing pressure in the first six months of 2003. The retail merchandising gross
profit percentage increased 0.9% (from 48.0% to 48.9%) in the first half of 2003
compared to the first half of 2002. The increase was principally due to an
improvement in RDS gross profit in Europe.
For the first six months of 2003 and 2002, field service and installation costs
were 8.8% and 8.4% of net revenues, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Selling, General, and Administrative Expenses
SG&A expenses increased $7.7 million (or 7.4%) over the first half of
2002 (from $103.8 million to $111.5 million). Foreign currency translation
increased SG&A expenses in the first six months of 2003 by approximately $11.2
million (or 10.8%) over the comparable period in 2002. The second quarter of
2002 included $2.8 million of compensation costs associated with executive
management changes and legal fees for the ID Security Systems Canada Inc.
litigation. As a percentage of net revenues, SG&A expenses decreased from 34.1%
to 33.6%.
Other (Loss)/Income, net
Other (loss)/income, net represented a net foreign exchange gain of $0.5 million
and a net foreign exchange loss of $0.1 million for the first half of 2003 and
2002, respectively.
Interest Expense and Interest Income
Interest expense for the first half of 2003 decreased $1.6 million from the
comparable half in 2002 (from $7.6 million to $6.0 million) due to debt
repayment in the last twelve months. Interest income for the first half of 2003
decreased by $0.2 million from the comparable half in 2002 (from $0.9 million to
$0.7 million) as a result of lower interest rates on cash investments.
Income Taxes
The effective tax rate for the first six months of 2003 was 33.0%. The effective
tax rate for the first half of 2002 was 32.0%. The higher tax rate results
primarily from foreign income tax rate differentials.
Net Earnings/(Loss)
The Company's net earnings for the first half of 2003 were $15.1 million, or
$0.43 per diluted share, compared to a net loss of $62.8 million, or $1.55 per
diluted share, in the first half of 2002. Included in the net loss for the first
six months of 2002 is the cumulative effect of the change in accounting
principle of $72.9 million, which resulted from the Company's adoption of
Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and
Other Intangible Assets." The earnings before cumulative effect of change in
accounting principle for the first half of 2002 was $10.1 million, or $0.31 per
diluted share.
Exposure to International Operations
Approximately 66% of the Company's sales are made in currencies other than U.S.
dollars. Sales denominated in currencies other than U.S. dollars increase the
Company's potential exposure to currency fluctuations which can affect results.
Management cannot predict, with any degree of certainty, changes in currency
exchange rates and therefore, the future impact that such changes may have on
its operations.
Restructuring
The changes in the provision for restructuring are covered in Note 8 of the
consolidated financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
The Company's liquidity needs have related to, and are expected to continue to
relate to, capital investments, acquisitions, and working capital requirements.
The Company has met its liquidity needs over the last three years primarily
through funds provided by long-term borrowings and more recently through cash
generated from operations. Management believes that its anticipated cash needs
for the foreseeable future can be funded from cash and cash equivalents on hand,
the availability under the $100 million revolving credit facility, and cash
generated from future operations.
The Company's operating activities generated approximately $23.6 million during
the first half of 2003 compared to $41.3 million in the same period in 2002.
This change from the prior year was primarily attributable to an increase in
working capital.
During the second quarter 2003, $3.0 million of unscheduled repayments were made
on the $25 million collateralized term loan. At June 29, 2003, EUR 43.6 million
(approximately $49.8 million) and $2.0 million were outstanding under the
multi-currency term loan. The outstanding borrowings under the revolving credit
facility were JPY 300 million (approximately $2.5 million). The availability
under the $100 million multi-currency revolving credit facility has been reduced
by letters of credit totaling $11.9 million, primarily related to the surety
bond posted in connection with ID Security Systems Canada Inc. litigation.
The Company does not anticipate paying any cash dividend in the near future and
is limited by existing covenants in the Company's debt instruments with regard
to paying dividends.
On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States
District Court for the Eastern District of Pennsylvania, filed by plaintiff ID
Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of
the Company on the plaintiff's claim for Monopolization of Commerce, but against
the Company on claims of Attempted Monopolization and Conspiracy to Monopolize.
In addition, the jury held against the Company on two tort claims related to
tortious interference and unfair competition. Judgment was entered on the
verdict in favor of the plaintiff, after trebling, in the amount of $79.2
million plus attorneys' fees and costs to be determined by the Court.
On March 28, 2003, the Court issued an order which vacated the jury verdict on
the antitrust claims and reduced the damages award related to tortious
interference and unfair competition from $19 million to $13 million. The Company
subsequently filed an additional motion to further reduce the $13 million by
$2.1 million based on a prior agreement between the parties and a previous Order
by the Court. The Court granted the Company's motion, and on May 20, 2003
further reduced the judgment from $13 million to $10.9 million. On the same
date, the Court (1) authorized the release to the Company of the $26.4 million
bond and escrowed treasury shares previously posted as security by the Company,
(2) directed the Company to post a replacement bond in the reduced amount of
$11.3 million, which amount was subsequently amended to $11.4 million, and (3)
stayed execution of the judgment upon the posting of said bond by the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company promptly posted the requisite bond and execution on the judgment in
the amount of $10.9 million is now stayed. Both ID Security Systems Canada Inc.
and the Company have filed appeals to the Third Circuit Court of Appeals
related to the various decisions of the Court. (See Note 9 of the Consolidated
Financial Statements.)
Although management expects to prevail upon appeal, should the appeal be
unsuccessful, management anticipates that the final judgment would not be paid
prior to the end of 2004 and is of the opinion that the Company will have
sufficient financial resources in the form of cash and borrowing capacity, due
to the cash flow generated during the intervening period, to satisfy any
judgment. The recording of a liability or a final judgment could cause the
Company to be in default of certain bank covenants. In this event, management
would pursue various alternatives, which may include, among other things, debt
covenant waivers, debt covenant amendments, or refinancing of debt. While
management believes it would be successful in pursuing these alternatives, there
can be no assurance of success.
Capital Expenditures
The Company's capital expenditures during the first half of fiscal 2003 totaled
$7.8 million compared to $3.0 million during the first half of fiscal 2002. The
increase in 2003 principally resulted from additional manufacturing-related
investments. The Company anticipates its capital expenditures to approximate $14
million in 2003.
Exposure to International Operations
The Company manufactures products in the USA, the Caribbean, Europe, and the
Asia Pacific region for both the local marketplace as well as for export to its
foreign subsidiaries. The subsidiaries, in turn, sell these products to
customers in their respective geographic areas of operation, generally in local
currencies. This method of sale and resale gives rise to the risk of gains or
losses as a result of currency exchange rate fluctuations.
The Company has been selectively purchasing currency exchange forward contracts
on a regular basis to reduce the risks of currency fluctuations on short-term
receivables. These contracts guarantee a predetermined exchange rate at the time
the contract is purchased. This allows the Company to shift the risk, whether
positive or negative, of currency fluctuations from the date of the contract to
a third party.
As of June 29, 2003, the Company had currency exchange forward contracts
totaling approximately $19.9 million. The contracts are in the various local
currencies covering primarily the Company's Western European operations along
with the Company's Canadian and Australian operations. Historically, the Company
has not purchased currency exchange forward contracts where it is not
economically efficient, specifically for its operations in South America and
Asia.
The Company has historically not used financial instruments to minimize its
exposure to currency fluctuations on its net investments in and cash flows
derived from its foreign subsidiaries.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER MATTERS
- -------------
New Accounting Pronouncements and Other Standards
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables".
The standard provides guidance on how to account for arrangements that involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into by the Company after June 29, 2003. The Company does
not expect the adoption of EITF Issue No. 00-21 to have a significant impact on
its consolidated financial statements.
In January 2003, the FASB issued interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51". FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied to the Company's consolidated financial
statements for the period ending September 28, 2003. The Company does not expect
the adoption of FIN 46 to have a significant impact on its consolidated
financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the market risks as disclosed in item
7a of the Company's Annual Report on Form 10-K filed for the year ending
December 29, 2002, which item is incorporated herein by reference.
Item 4. DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based on this evaluation, the Company's principal executive
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective in alerting them, on a timely basis, to
material information required to be included in the Company's periodic SEC
reports. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in certain legal and regulatory actions, all of which
have arisen in the ordinary course of business, except for the matters described
in the following paragraphs. Management believes it is remotely possible that
the ultimate resolution of such matters will have a material adverse effect on
the Company's consolidated results of operations and/or financial condition,
except as described below.
On May 24, 2002, the jury in the Civil Action No. 99-CV-577 in the United States
District Court for the Eastern District of Pennsylvania, filed by plaintiff ID
Security Systems Canada Inc. against Checkpoint Systems, Inc., held in favor of
the Company on the plaintiff's claim for Monopolization of Commerce, but against
the Company on claims of Attempted Monopolization and Conspiracy to Monopolize.
In addition, the jury held against the Company on two tort claims related to
tortious interference and unfair competition. Judgment was entered on the
verdict in favor of the plaintiff, after trebling, in the amount of $79.2
million plus attorneys' fees and costs to be determined by the Court.
On June 14, 2002, in response to Motions filed by the Company, the Court stayed
the execution of the judgments pending disposition of the Company's Motion for
Post-Trial Relief and ordered the Company to post a bond in the amount of $26.4
million and to place into escrow 3,179,600 shares of the Company's treasury
stock. The Company complied with the Court's order.
On March 28, 2003, in response to the Company's Motion for Post-Trial Relief,
the Court issued an order which vacated the jury verdict on the antitrust claims
and reduced the damages award related to tortious interference and unfair
competition from $19 million to $13 million. The Company subsequently filed an
additional motion to further reduce the $13 million by $2.1 million based on a
prior agreement between the parties and a previous Order by the Court. The Court
granted the Company's motion, and on May 20, 2003 further reduced the judgment
from $13 million to $10.9 million. On the same date, the Court (1) authorized
the release to the Company of the $26.4 million bond and escrowed treasury
shares previously posted as security by the Company, (2) directed the Company to
post a replacement bond in the reduced amount of $11.3 million, which amount was
subsequently amended to $11.4 million, and (3) stayed execution of the judgment
upon the posting of said bond by the Company. The Company promptly posted the
requisite bond and execution on the judgment in the amount of $10.9 million is
now stayed.
Both ID Security Systems Canada Inc. and the Company have filed appeals to the
Third Circuit Court of Appeals related to the various decisions of the Court.
Based on input from outside legal counsel, management is of the opinion that the
Judge's Order is consistent with the law as it relates to the antitrust issues,
and is not consistent with the law as it relates to the tortious interference
and unfair competition aspects of the case. Accordingly, no liability has been
recorded for this litigation, as management believes that, at this time, it is
not probable the remaining judgment will be upheld and that the reasonably
possible range of the contingent liability is between zero and $11 million.
Management believes it is remotely possible that the Court of Appeals could
reverse the decision of the lower Court as it relates to the antitrust claims
and reinstate the original judgment of $79.2 million plus attorneys' fees and
costs. If the final outcome of this litigation, after all appeals have been
exhausted, results in certain of the plaintiff's claims being upheld, the
potential damages could be material to the Company's consolidated results of
operations and/or financial condition and could cause the Company to be in
default of certain bank covenants. Although management expects to prevail in the
appeal process, should the appeal be unsuccessful, management anticipates that
any final judgment would not be paid prior to the end of 2004 and is of the
opinion that the Company will have sufficient financial resources in the form of
cash and borrowing capacity, due to the cash flow generated during the
intervening period, to satisfy any judgment.
A certain number of follow-on purported class action suits have arisen in
connection with the jury decision in the ID Security Systems Canada Inc.
litigation. The purported class action complaints generally allege a claim of
monopolization and are substantially based upon the same allegations as
contained in the ID Security Systems Canada Inc. case (Civil Action No.
99-CV-577) as follows:
On August 1, 2002, a civil action was filed in United States District Court for
the Eastern District of Pennsylvania, designated as Civil Action No. 02-6379(ER)
by plaintiff Diane Furs, Inc. t/a Diane Furs against Checkpoint Systems, Inc.
and served on August 21, 2002. On August 21, 2002, a Notice of Substitution of
Plaintiff and Filing of Amended Complaint was filed by the plaintiff, and the
named plaintiff was changed to Medi-Care Pharmacy, Inc.
On August 2, 2002, a civil action was filed in the United States District Court,
District of New Jersey (Camden) designated as Docket No. 02-CV-3730(JEI) by
plaintiff Club Sports International, Inc., d/b/a Soccer CSI against Checkpoint
Systems, Inc. and served on August 26, 2002.
On October 2, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-4777 (JBS)
by plaintiff Baby Mika, Inc. against Checkpoint Systems, Inc. and served on
October 7, 2002.
On October 23, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5001 (JEI)
by plaintiff Washington Square Pharmacy, Inc. against Checkpoint Systems, Inc.
and served on November 1, 2002.
On October 18, 2002, The United States District, District of New Jersey (Camden)
entered an Order staying the proceedings in the Club Sports International, Inc.
and Baby Mika, Inc. cases referred to above. In accordance with the Order, the
Stay will also apply to the Washington Square Pharmacy, Inc. case referred to
above. In addition, the Medi-Care Pharmacy, Inc. case, referred to above, will
be voluntarily dismissed, and it has been re-filed in New Jersey and is included
in the Stay Order. The Stay is expected to remain in place until such time as
the ID Security Systems case, referred to above, is either terminated or any
appeals have been exhausted in the Third Circuit Court of Appeals.
On November 13, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-5319 (JEI)
by plaintiff 1700 Pharmacy, Inc. against Checkpoint Systems, Inc. and served on
November 15, 2002.
On December 30, 2002, a civil action was filed in the United States District
Court, District of New Jersey (Camden) designated as Docket No. 02-CV-6131 (JEI)
by plaintiff Medi-Care Pharmacy, Inc. against Checkpoint Systems, Inc. and
served on January 3, 2003.
Both the 1700 Pharmacy, Inc. case and the Medi-Care Pharmacy, Inc. case were
consolidated with the previously mentioned cases and are included in the Stay
Order referred to above. No liability has been recorded for any of the purported
class action suits as management believes that, based on input from outside
legal counsel, it is not probable the judgment will be upheld and that the lower
end of the reasonably possible range of the contingent liability is zero at this
time. The high end of the range cannot be estimated at this time.
On February 28, 2003 a civil action was filed in the Superior Court of New
Jersey, Bergen County, by Franklin Graphics, Inc. against Checkpoint Systems,
Inc. and Christopher Clarke, (Docket No. BER-L-1575-03) seeking compensatory
damages in excess of $1 million, treble damages, punitive damages, and
attorneys' fees. The plaintiff alleges tortious interference with a contractual
relationship and prospective economic relations, unfair competition, violation
of duty loyalty, breach of contract and consumer fraud.
The factual basis for the suit may be summarized as follows. The Company
performed clothing label tag printing services as a subcontractor to the
plaintiff for a number of apparel manufacturers who were customers of the
plaintiff. Co-defendant Clarke was an employee of plaintiff who had
responsibility for interfacing with apparel manufacturers and the Company
Defendant Clarke left the employ of plaintiff early in 2002, establishing his
own business. Subsequently, defendant Clarke joined the Company as an employee.
Certain of the customers of the plaintiff ceased doing business with plaintiff
and engaged Checkpoint directly to perform the clothing label tag printing
services.
The Company disputes any liability to plaintiff and intends to defend this
matter vigorously. The Company has filed a motion to dismiss the consumer
fraud/treble damage claim and intends to counterclaim for approximately $0.1
million for goods and services provided. The potential likelihood of collection
on the counterclaim or liability on the plaintiff's claims cannot be estimated
at this time, therefore no liability has been recorded for this suit. Management
is unable to predict the outcome of this proceeding, but does not believe that
the ultimate resolution will have a material adverse affect on the consolidated
financial position or results of operation of the registrant, however, if such
matter were determined adversely to the registrant, the ultimate liability
arising therefrom should not be material to the financial position of the
Company, but could be material to its results of operation in any quarter or
annual period.
The Company is a plaintiff in a number of patent infringement suits around the
world against various defendants in an effort to enforce certain of the
Company's intellectual property rights. In each of these proceedings, the
defendants have challenged the validity of the Company's patents. In the event
the relevant patent were to be modified or invalidated, such action could
diminish or eliminate the value to the Company of the relevant patent.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of shareholders was held on May 1, 2003.
(b) Directors elected at the meeting were: Alan R. Hirsig, George W. Off, and
Sally Pearson. Directors whose term of office as a director continued after
the meeting are: Robert O. Aders, William S. Antle, III, W. Craig Burns,
David W. Clark, Jr., John E. Davies, Jr., R. Keith Elliott, and Jack W.
Partridge.
(c) Shareholders voted upon the election and approved the following two matters:
(1) The election of Alan R. Hirsig, George W. Off, and Sally Pearson as the
Company's Class III directors to hold office until the 2006 Annual
Shareholders Meeting. Shareholders voted as follows:
Alan Hirsig George W. Off Sally Pearson
------------ ------------- -------------
For 22,560,775 23,792,321 24,716,753
Against 4,236,876 3,005,330 2,080,898
---------- ---------- ----------
26,797,651 26,797,651 26,797,651
========== ========== ==========
(2) To amend the Company's Stock Option Plan (1992) to increase by
4,000,000 the number of shares for which options may be granted
thereunder from 12,000,000 to 16,000,000.
For Against Abstained Unvoted
---------- --------- ----------- ---------
13,734,614 6,790,420 43,021 6,229,596
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of George W. Off,
Chairman of the Board, President and Chief Executive Officer.
99.2 Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of W. Craig Burns,
Executive Vice President, Chief Financial Officer and Treasurer.
99.3 Exhibit 32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On March 31, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated March 28, 2003, announcing that the
federal judge in the ID Systems Canada Inc. antitrust case against the
Company issued an order which vacates the antitrust verdict in its
entirety. In addition, the judge reduced the damages awarded against the
Company in the tortuous interference and unfair competition part of the
suit from $19 million to $13 million.
On April 23, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated April 22, 2003, announcing its financial
results for the first quarter of 2003.
On April 25, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated April 25, 2003, announcing that it has
filed an appeal with the US Third Circuit Court of Appeals of the
decision of the US District Court in the lawsuit brought by ID Security
Systems Canada Inc.
On May 19, 2003, the Company filed a Current Report on Form 8-K/A.
On June 5, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated May 22, 2003 announcing the promotion
of Per Levin to Executive Vice President, General Manager of Europe and
that John E. Davies, Jr., had assumed the new title of Executive Vice
President, General Manager of the Americas and Asia Pacific.
On June 24, 2003, the Company filed a Current Report on Form 8-K
attaching a press release dated June 24, 2003, announcing that John R.
Van Zile was appointed Senior Vice President, General Counsel and
Secretary.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHECKPOINT SYSTEMS, INC.
/s/W. Craig Burns August 1, 2003
- ----------------------------
W. Craig Burns
Executive Vice President,
Chief Financial Officer and Treasurer
/s/Arthur W. Todd August 1, 2003
- ----------------------------
Arthur W. Todd
Vice President, Corporate Controller
and Chief Accounting Officer
INDEX TO EXHIBITS
-----------------
Exhibit Description
- ------- -----------
99.1 Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of George W. Off,
Chairman of the Board, President and Chief Executive Officer.
99.2 Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of W. Craig Burns,
Executive Vice President, Chief Financial Officer and Treasurer.
99.3 Exhibit 32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.